What to budget for closing costs when buying a house
Are you considering purchasing a home for the first time? Then you’re probably already saving money for your down payment. But what about all the other costs needed to complete the transaction? Understanding what expenses are required at closing to buy a house will help you budget and save more effectively. In this article, we break down exactly what closing costs are so you’re prepared when you start shopping for a home:
What are closing costs?
Closing costs are the thousands of dollars associated with buying a home. These expenses vary state-by-state, due to the differences in property and transfer tax, as well as rates charged by different attorneys and lenders.
On average, closing costs equal about 1 to 4% of your home’s value, which isn’t something most home buyers are usually aware of. In fact, according to a study conducted by Wilson Perkins Allen Opinion Research, 50% of buyers were “surprised” by how much they were charged at closing. Knowing exactly how much money you need to come up with, in addition to your down payment, will make purchasing your home a less stressful process.
Here are some of the fees you may be expected to pay before getting the keys to your new home:
1. Loan Origination Fee
Loan origination fees are what lenders charge to set up a loan. This includes courier fees, underwriting fees, appraisal costs, administrative fees, etc. The costs vary depending on the lender, but typically range between 0.5% – 1% of the loan amount.
2. Application Fee
This fee covers your application process for a loan and includes the cost to run a credit report, as well as additional administrative fees. The application fee varies depending on the lender you’re working with but can be anywhere from $300-$500.
3. Mortgage Broker Fee
Closing costs include a commission fee that brokers charge at the end of the mortgage process, which is why homeowners are encouraged to shop around for the right mortgage broker. These fees vary but are usually between 0.5% to 2.75% of the home’s purchase price.